Barnes & Noble and Microsoft Still Have an Uphill Battle

Despite Barnes & Noble Inc. (NYSE:BKS) being sued last year by Microsoft Corp. (NASDAQ:MSFT) for patent infringements, the two companies have decided to make nice. On Monday, the two companies announced that Microsoft is investing $300 million into Barnes & Noble’s Nook business and college-texts unit, referred to as Newco in the press release. The deal values the new subsidiary at $1.7 billion, giving Microsoft a 17.6 percent stake and Barnes & Noble an 82.4 percent stake. While the move will expand the Nook’s reach, Barnes & Noble still has an uphill battle.

As part of the deal, the two companies agreed to settle their patent litigation and Microsoft will integrate a Nook application in its new Windows 8, which is scheduled to a preview available in early June. The companies explained in a press release, “One of the first benefits for customers will be a NOOK application for Windows 8, which will extend the reach of Barnes & Noble’s digital bookstore by providing one of the world’s largest digital catalogues of e-Books, magazines and newspapers to hundreds of millions of Windows customers in the U.S. and internationally.”

Although Microsoft still has an advantage in personal computers, its presence in the mobile market is quite lacking. Apple Inc. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) clearly have a leap of a head start. Apple has its iPhone and iPad, while Amazon has the recently released Kindle Fire. By the end of this year, analysts estimate that the total number of iPads sold since the first generation was launched in 2010 will surpass 100 million. Meanwhile, the Kindle Fire dominates Google Inc.’s (NASDAQ:GOOG) Android-based market.

According to a new report released by comScore (NASDAQ:SCOR) last week, a global leader in measuring the digital world, the Kindle Fire has almost doubled its share of the Android tablet market over the December to February time period. In a press release, the company explained, “The Kindle Fire, introduced to the market in November 2011, has seen rapid adoption among buyers of tablets. Within the Android tablet market, Kindle Fire has almost doubled its share in the past two months from 29.4 percent share in December 2011 to 54.4 percent share in February 2012, already establishing itself as the leading Android tablet by a wide margin.” In the company’s latest earnings report, Amazon said the Kindle Fire was the bestselling item on its website, shipping 4.7 million units in the fourth-quarter.

Perhaps the biggest development of the deal is that it brings the bookseller one step closer to spinning off its digital business, which includes the Nook. Barnes & Noble announced earlier this year that it might spin off its digital business, as sales at brick-and-mortar stores continue to struggle in the high-tech age. Remember Borders? A spin-off could unlock value and help Barnes & Noble focus on the future of its technology. In any case, the deal allows Barnes & Noble to stay in the game longer and seek ways to compete with Apple and Amazon in the mobile space. Shares of the company had been down about 5 percent year-to-date, but surged 90 percent immediately after the news.